8/06/2008 @ 6:00PM

Minor Leagues, Major Profits

When most people think of Minor League Baseball they picture teams traveling to one-horse towns on broken-down buses, stadiums with hand-operated scoreboards, and bleachers with aging female baseball groupies like the one played by Susan Sarandon in the movie Bull Durham.

Twenty years ago that image would have been accurate for the majority of “farm teams,” whose main purpose is to train prospects for the major leagues. But times have changed. MiLB teams like the Sacramento River Cats, Dayton Dragons, Toledo Mud Hens and, yes, Durham Bulls are run like first-rate professional clubs, play in modern ballparks and make a tidy profit. These teams are operated by a new breed of owners–many of whom are successful entrepreneurs in other industries–who understand marketing and have moved teams from small towns to bigger, more affluent cities that are much closer to their big league affiliates.

In the first-ever exhaustive analysis on the finances of minor league baseball, Forbes ranks the 20 most valuable MiLB teams. We focused our study on the 160 minor league teams in either class AAA, AA or A (excluding rookie leagues) that, although they are independently owned and operated, are directly affiliated with a Major League Baseball team. Such teams have their ownership and capitalization vetted by both MiLB and MLB.

The most valuable team is the Sacramento River Cats, an affiliate of the Oakland Athletics owned by Art Savage and worth $29.8 million. The River Cats drew more than 700,000 fans last season (an average of 10,000 per game), the most in the minors.

The River Cats play in Raley Field, among the best stadiums in baseball, period. Raley Field is just eight years old, located just beyond California’s State Capital. Affluent patrons can been seen sipping Johnnie Walker at the bar, and the stadium has become a hot place for young adults to socialize on Friday and Saturday evenings. The River Cats own the stadium, which pulls in big advertising bucks from the likes of
Coca-Cola
. Lawn seats can be had for $5, and the team will throw you an 80-person fajita party in the James Hardie Party Deck for $3,800.

Rounding out the top five: The Memphis Redbirds, The Frisco RoughRiders, The Round Rock Express and the Indianapolis Indians, publicly traded under the ticker symbol INDN. Since its thinly traded shares were listed on the pink sheets in 2004, the price of Indian shares increased to $24,000 per share from $16,000, during a period the S&P 500 tanked. In 2007, the Indians increased the dividend to $350 a share from $200 as net income increased to $1.3 million from $810,000.

To create the list, our first step was to cut our list of candidates down to a manageable size by focusing on the 30 MiLB clubs with the highest attendance. For these teams we pieced together their profit and loss statements by speaking with people familiar with their finances, reviewing their ballpark leases and, when we could not get figures from an outside source, derived estimates based on teams that play in comparable markets and stadiums for which we had solid figures. We based our team values on multiples of attendance and revenue, using historical transactions as a guide. (Note: The Lehigh Valley IronPigs, who moved from Ottawa, Canada, to Allentown, Pa., prior to the 2008 season, were not part of this valuation because of insufficient data.)

On average, the top 20 teams are worth $21.2 million and pulled in $9.8 million in revenue per team, of which 49% came from tickets. The great economics of the minor leagues: Player costs–typically between $10 million and $15 million a season for scouting, salaries and bonuses–are paid by the big league affiliates. As a result, margins for clubs that draw well are often fat, and these 20 clubs generated average operating income (earnings before interest, taxes and depreciation) of $3 million.

The sixth-ranked Dayton Dragons highlight another big difference between the major and minor leagues: For the former, winning is key to filling the ballpark; for the latter it is affordability (it cost a family of four about $50 for tickets, food and parking for a minor league game, less than one-third the cost of a big league contest) and non-baseball entertainment (most teams have an abundance of contests for fans as well as play areas for children).

Since being moved from Rockford, Ill., to Ohio after they were purchased by Mandalay Sports Entertainment in 1998, the Dragons have sold out every game and have a 10-year waiting list for season tickets despite several losing seasons. About an hour’s drive from Cincinnati, the team’s average ticket price is just $10.50, compared with $18 for the Reds. Besides the action on the field, the Dragons employ four mascots and have toddler races and T-shirt tossing contests to entertain the crowd.

Says Randel Vataha, founder and president of Game Plan, a Boston sports banking company that has been involved in several minor league team transactions: “Minor league teams compete with movie theaters for entertainment dollars. You charge people $8 to $10 to get in, and then sell them as much beer, hot dogs and popcorn as you can.”

Once MiLB teams with a modern ballpark can get annual attendance up to the 400,000 range, Vataha notes, they can generate significant revenue from sponsors, especially if the team has a modern stadium where luxury suites can be given to sponsors who lavish advertising revenue on the team. Says Vataha, “With a minor league team, you are really running a themed restaurant with a cover charge.” We estimate Dayton, which has 30 suites at its state-of-the-art Fifth Third Field, raked in $2.5 million in sponsorship revenue last season, fourth-most in the minors.

Combined, Mandalay Sports Entertainment, an arm of Mandalay Entertainment Group of Los Angeles, which owns five farm clubs, probably possesses the most valuable collection of minor league teams. Mandalay’s Chairman and CEO is legendary movie producer Peter Guber (Midnight Express, Flashdance and Batman). Says Guber: “Our focus is on family entertainment, affordability, customer service and working intensely with sponsors on what will work best for them.”

By owning teams throughout the country, Mandalay has shown how to build value in all kinds of markets, and its reputation is so great that executives in the National Hockey League, Arena Football and Major League Soccer have tapped into Mandalay’s expertise on how they can improve branding, marketing and sponsorships.

Mandalay owns controlling stakes in the RoughRiders and Dragons and, along with the New York Yankees, operates a third (Scranton/Wilkes Barre Yankees) with an option–which it expects to exercise–to buy from Lackawanna County, Pa.

The combined value of these three clubs is $68 million, and their aggregate operating income was an estimated $15.6 million in 2007. Clever marketing and sponsorship deals are Mandalay’s trademark. Its teams provide fans with a free program each game called Play Ball that has fresh statistics each game. Most teams sell their programs, but by giving theirs away Mandalay is able to assure sponsors that thousands of fans will have them, in turn enabling Mandalay to sell pricier category exclusive sponsorships and feature sponsor’s logos on the covers.

Feel threatened by the professionalism that has infiltrated the way farm teams are currently run? Don’t be. There’s still plenty of Bull Durham fun in the minors. There’s just a lot more money now too.